Jeffrey Sachs Discusses The War in Ukraine, ‘Shock Therapy,’ and More

Perhaps the most stunning bit of information in the interview comes from Sachs’s disclosure of the reason for the failure of “Shock therapy” in Russia. “Shock therapy” is the name given to the abrupt transition from the Soviet-style command economy to a market-oriented economy. It was a success in Poland, but a failure in Russia where it led to a depression deeper and more costly than our own Great Depression. Why? Sachs was an advisor to Poland and then Russia for the “therapy.” So he had witnessed a “controlled experiment,” as he put it elsewhere. At a certain point it the process, financial help from the outside was needed to revive the economy on a new basis. It was provided to Poland; but when Sachs called for the same help in Russia, it was refused by the West, specifically by the White House. This happened despite Sachs’s direct pleas to the White House. The depression that followed was neither accidental nor a surprise. Far from it. This was the first time that the US attempted to “weaken” post-Cold War Russia, an attempt that was eventually reversed under Putin.

Related:

Russian aid controversy:

With the collapse of the Soviet Union, the United States Agency for International Development (USAID) funded a project by the HIID to help rebuild the Russian economy on the basis of western concepts of ethics, democracy and free markets. Jeffrey Sachs was said to have “packaged HIID as an AID consultant”. USAID were glad to accept help from Harvard, since they lacked expertise for such a project. The HIID oversaw and guided disbursement of $300 million of US aid to Russia with little oversight by USAID. HIID advisers worked closely with representatives from Russia, notably Anatoly Chubais and his associates. Once USAID accepted help from the HIID, HIID was in a position to recommend U.S. aid policies while being a recipient of that aid. It also put the HIID in a position of power overseeing some of their competitors. The project, which ran from 1992 to 1997, was headed by economist Andrei Shleifer and lawyer Jonathan Hay. HIID received $40.4 million in return for its activities in Russia, awarded without the normal competitive bidding approach.

In 1996 the US Congress asked the General Accounting Office to investigate the HIID activities in the Russian aid program after multiple complaints to the congressional office had been made. The initial published GAO report considered the USAID’s oversight over Harvard’s Russia project “lax.” The US government attempted to hold the Harvard players responsible for their clear conflicts of interest and undeniable misuse of government money but action was slow to ensue. The original GAO report was critical, and further funding was withdrawn from HIID on the basis that as a contractor HIID has “abused the trust of the U.S. government by using personal relationships for private gain”.

in 1997, the USAID ended a $14 million grant to the Harvard Institute for International Development after Andrei Shleifer was accused of using the institute to help his wife Nancy Zimmerman’s investments in Russia. As part of a settlement, Zimmerman subsequently paid $1.5 million to the USG through one of her companies, Farallon Fixed Income Associates.

In September 2000 Shleifer and Hay were accused by the Justice Department of making personal investments in Russia, and therefore failing to act as impartial advisers. The episode became a factor in the dismissal of Larry Summers, who had set up the project as deputy secretary of the treasury under President Bill Clinton.

Dissolution

The President of the institute from 1995, Jeffrey Sachs, resigned in 1999 to form the Center for International Development (CID), which would focus more on academic research than on consulting. The CID was founded as a joint project of the John F. Kennedy School of Government and the HIID. A task force was appointed in July 1999 to review the future of the HIID, which in January 2000 concluded that it should be dissolved, with its functions distributed to faculties within the University. Reasons included the Russian conflict of interest scandal, structural problems and financial deficits in 1998 and 1999. In 2005, the university was required to pay the US government a settlement of $26.5 million for their involvement in the Russian development scandal. JThe CID, housed at the Harvard Kennedy School, is now Harvard’s primary center for research on international development.